There is a place in the setup of the deduction to select which types of taxes are to be calculated using a basis less the amount of the deduction. In setup deductions you can check the  FWH - Before employee taxes box and deselect the SWH - Before employee taxes box.  Keep in mind that if you have employees that work in other states where the 401k is not included in the taxable income you will need to set up more than one 401k Deduction ID. 

Thanks Denise, that is kind of what I was guessing is that it would need to be a separate ID for the other states but wanted to make sure I wasn't overlooking something.

It can get more complicated if you have employees that work in more than one state and/or local in the same pay period where different rules apply. In that type of situation may consider using different pay ids for time worked in (for example) PA than for time worked in other states where the 401k contributions are not taxable. Then a formula could be used to lookup the total Pay amounts on the PR check pay records in order to calculate the 401k basis appropriately for each of the 401k deductions